Operations Management

The Advantages of Change in Pharmaceutical Management

April 11, 2018 11:41 am

The supply chain for prescription drugs has undergone significant change in the past 60 years. First came generic drugs in the mid-1960s, then the growth of group purchasing organizations. Finally, the Internet age ushered in a faster, more efficient process for ordering; today, orders can be communicated via handheld devices, then placed and delivered on the same day. Despite such progress, however, health care has a long way to go toward optimal efficiency in the prescription drug supply chain.

Hospital purchasers of pharmaceuticals all too often rely on estimates, with little supporting data, to determine purchase quantities, resulting in the expiration and return or disposal of many products, with a high percentage of the returns not qualifying for a manufacturer credit. The exhibit below shows a five-hospital health system’s pharmaceutical returns history over a period of 12 months. The analysis shows that the health system had a total inventory value of pharmaceutical returns of $1,962,117, with $781,260 of that total not qualifying for manufacturer credits. The analysis also identifies, by manufacturer returns policies, the value of the inventory losses by category. Clearly, the cost of such waste is significant.

Pharmacy Returns: 5-Hospital System in Florida

The issue has become so significant that a multi-million-dollar industry now exists to process billions of dollars of expired pharmaceuticals. Hospitals and health systems should take action address this issue by considering the following keep points to develop strategies for managing pharmaceuticals more efficiently. 

PAR Levels

Give that pharmaceuticals constitute the second-largest expense for a hospital after labor, managing them effectively should be a priority. Establishing periodic automatic replacement (PAR) levels would eliminate the guesswork in pharmaceutical purchasing and possibly reduce the cost of lost inventory. Consider this example: A large closed pharmacy organization that established PAR levels for their pharmaceuticals saw an inventory reduction of $20 million and, within 15 months, a decline of  $3 million in expired products that failed to qualify for manufacturer credits. Of significance is the fact that the reduction in the lost inventory value of noncreditable returns is an annual savings. 

Management of Pharmaceuticals in Remote Locations

The management of pharmaceuticals in remote locations such as emergency carts, heart and stroke kits, contract reaction boxes, and many other locations proves challenging with the current method of using stickers affixed to carts or containers, indicating the shortest-dated product contained within. Monthly canvassing of the hospital by pharmacy personnel and others will identify locations where expired products need to be replaced; however, this process is labor-intensive and subject to errors and omissions. In addition, although these products are necessary to have on hand in the case of a patient crisis, they have little or no expectation of usage. Therefore, the vast majority of these products will remain dormant in their locations until they expire. And because most of these product quantities are considered partial units of sale, they will not qualify for credit when they expire, based on most manufacturers’ returns policies.   

Following are some suggestions for changes in the timing of managing these products that could not only reduce the lost inventory value of non-creditable expired products, but also reduce the labor for managing such product.

  • Replenish expiring products semiannually.
  • Rotate products well before expiration, allowing adequate time for these products to be administered, converting the lost inventory value to a source of a billable revenue.
  • Replace all products that will expire within the next six months with products specifically purchased for placement in remote locations. The newly acquired products will have a minimum of two-year dating or more, meaning their future replacements will not have to be addressed for at least 18 months.

Ordering Cycle

A change to the timing of pharmacy deliveries also could result in cost savings. Reducing daily deliveries to three to four times per week would cut transportation and labor costs significantly, especially when hospitals and distribution centers are far away from each other. 

A Sweeping Challenge and Opportunity

The points discussed here are only aspects of a larger challenge that faces the healthcare industry due to ineffective management of pharmaceutical supplies. Other concerns that bear mentioning include the unmeasured environmental impact from incinerating billions of dollars of expired pharmaceuticals and the risks associated with over-ordering and poorly managing supplies of opioids.

The opportunity for better managing pharmaceuticals within hospitals and related non-acute care facilities abound. Applying logic and existing processes for managing inventory would greatly benefit the hospital industry and the public and patients they serve.

Robert Miller is vice president of sales and marketing at Cost Control Solutions, LLC, Rockledge, Fla. 


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